February 01, 2008 at 08:00 AM EST
Arch Coal, Inc. Reports Full Year 2007 Results
Strong fourth quarter caps Arch Coal's second-best year on record

ST. LOUIS, Feb. 1 /PRNewswire-FirstCall/ -- Arch Coal, Inc. (NYSE:ACI) today reported fourth quarter 2007 net income available to common shareholders of $81.3 million, or $0.56 per fully diluted share, on income from operations of $75.1 million and adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA") of $142.9 million. In the fourth quarter of 2006, the company earned net income available to common shareholders of $79.5 million, or $0.55 per fully diluted share, on income from operations of $60.5 million and adjusted EBITDA of $117.7 million.

For the full year 2007, Arch earned net income available to common shareholders of $174.7 million, or $1.21 per fully diluted share, compared with $260.6 million, or $1.80 per fully diluted share, for full year 2006. The company also earned $471.7 million of adjusted EBITDA in 2007, compared with $545.0 million in 2006, when market conditions were more favorable.

"During 2007, Arch Coal achieved our second-best year of earnings in the company's 10-year history as a public corporation," said Steven F. Leer, Arch's chairman and chief executive officer. "We are proud of the financial performance achieved in 2007, especially considering the weakened state of U.S. coal markets during much of the year. Also, we are particularly pleased with our fourth quarter results, which benefited from strong execution at our mines as well as positive momentum in global coal markets."

"Looking ahead, we are optimistic that domestic coal markets will continue to improve in 2008, driven by the strength of international coal markets," continued Leer. "We also expect the company to deliver a record performance in 2008, with meaningful expansion in operating margins, earnings per share and EBITDA."

Arch's Operations Deliver a Solid Performance in 2007

"Our operations ran exceptionally well during the fourth quarter, and turned in a solid performance for the full year 2007," said John W. Eaves, Arch's president and chief operating officer. "Each operating region made a substantial contribution in the quarter just ended, particularly in terms of cost containment and margin expansion. We applaud these efforts and look to build upon this performance in 2008."

"Additionally, the early start-up of our Mountain Laurel operation has exceeded our expectations and contributed meaningfully during the fourth quarter," added Eaves. "With the flexibility to sell a substantial portion of the mine's output into booming metallurgical and domestic pulverized coal injection markets, and with the mine's extremely competitive cost structure, we expect to significantly expand our operating margin in 2008."



                                                   Arch Coal, Inc.
                                           4Q07     3Q07     FY07     FY06

    Tons sold (in millions)                  33.7     34.0    132.4    127.4
    Average sales price per ton            $17.48   $16.02   $16.69   $16.57
    Cash cost per ton                      $12.60   $12.44   $12.73   $11.87
    Cash margin per ton                     $4.88    $3.58    $3.96    $4.70
    Total operating cost per ton           $14.60   $14.15   $14.54   $13.49
    Operating margin per ton                $2.88    $1.87    $2.15    $3.08

    Consolidated results may not tie to regional breakout due to rounding.
    Above figures exclude transportation costs billed to customers.
    Operating cost per ton includes depreciation, depletion and amortization
    per ton.
    Arch acts as an intermediary on certain pass-through transactions that
    have no effect on company results. These transactions are not reflected in
    this table. In addition, Arch services some legacy sales contracts by
    purchasing and supplying third-party coal and records offsetting revenue
    and expenses against a reserve established to account for these
    transactions. A supplemental regional schedule for all quarters beginning
    with FY06 can be found in the investor section of archcoal.com.


Consolidated average sales price per ton increased $1.46 during the fourth quarter of 2007 when compared with the third quarter, primarily reflecting larger volume and price realization contributions from Central Appalachia. Consolidated per-ton operating costs increased $0.45 over the same time period, driven by changes in the company's overall production mix. Arch's fourth quarter 2007 consolidated operating margin expanded by $1.01 per ton compared with the prior-quarter period, reflecting the contribution from the start-up of Mountain Laurel in Central Appalachia.

Consolidated 2007 average sales price per ton increased modestly over 2006, reflecting a slightly larger percent of Western Bituminous and Central Appalachian sales. Consolidated per-ton operating costs rose by $1.05 over the same time frame, resulting from changes in the company's overall production mix as well as increased commodity and input cost pressures in Arch's western operating regions. In 2007, Arch earned consolidated operating margin of $2.15 per ton compared with $3.08 per ton in 2006.



                                                    Powder River Basin
                                             4Q07     3Q07     FY07     FY06

    Tons sold (in millions)                  25.1     25.9     99.1     96.2
    Average sales price per ton            $10.71   $10.66   $10.59   $10.82
    Cash cost per ton                       $8.25    $8.25    $8.19    $7.51
    Cash margin per ton                     $2.46    $2.41    $2.40    $3.31
    Total operating cost per ton            $9.40    $9.41    $9.35    $8.67
    Operating margin per ton                $1.31    $1.25    $1.24    $2.15

    Above figures exclude transportation costs billed to customers.
    Operating cost per ton includes depreciation, depletion and amortization
    per ton.


In the Powder River Basin, fourth quarter 2007 volumes declined slightly from the prior-quarter period due to the timing of customer shipments. Even with a larger percentage of lower-priced volume from Arch's Coal Creek mine, average sales price per ton increased modestly when compared with the third quarter, largely due to higher pricing on market index-priced tons. Per-ton operating costs were generally flat over this same time period, despite reduced volumes and commodity cost pressures, resulting in the expansion of the region's per-ton operating margin.

Full year 2007 volumes increased modestly over 2006 due to the restart of Coal Creek in the second quarter of 2006. Average sales price per ton declined over the same time period, reflecting a larger mix of Coal Creek volume and weaker market conditions when compared with 2006. Full year 2007 per-ton operating costs increased moderately due to reduced volumes at Arch's Black Thunder mine and commodity cost pressures in the region. Arch's Powder River Basin operations contributed $1.24 per ton in operating margin in 2007 compared with $2.15 per ton in 2006.

                                                Western Bituminous Region
                                            4Q07     3Q07     FY07     FY06

    Tons sold (in millions)                   4.6      5.1     19.4     18.1
    Average sales price per ton            $24.84   $25.16   $24.73   $22.42
    Cash cost per ton                      $13.89   $17.38   $16.20   $12.99*
    Cash margin per ton                    $10.95    $7.78    $8.53    $9.43
    Total operating cost per ton           $17.71   $20.73   $19.62   $15.56*
    Operating margin per ton                $7.13    $4.43    $5.11    $6.86

    Above figures exclude transportation costs billed to customers.
    Operating cost per ton includes depreciation, depletion and amortization
    per ton.
    *Includes $41.9 million in proceeds from insurance recoveries related to
     West Elk outage.


In the Western Bituminous region, average sales price per ton declined in the fourth quarter of 2007 when compared with the third quarter, reflecting a less favorable mix of customer shipments. Due to the absence of any longwall moves in the fourth quarter, operating costs declined $3.02 per ton, leading to an expansion of operating margin of $2.70 per ton.

Full year 2007 volumes increased moderately compared with 2006, benefiting from a full year of production at Arch's West Elk mine, as well as the start-up of the company's Skyline mine during the second quarter of 2006. In the first quarter of 2006, West Elk experienced an outage related to a thermal event that occurred in late 2005. Average 2007 per-ton sales price realization increased $2.31 over the prior year, reflecting the roll-off of lower-priced sales contracts. Full year 2007 per-ton operating costs rose by $4.06, due to increased volumes from the higher-cost Skyline mine, higher input costs, and higher depreciation, depletion and amortization expense. Full year 2006 operating costs also benefited from $41.9 million in insurance recoveries, partially offset by costs related to the outage at West Elk in early 2006. Arch's Western Bituminous operations contributed $5.11 per ton in operating margin in 2007 compared with $6.86 per ton in 2006.



                                                   Central Appalachia
                                            4Q07     3Q07     FY07     FY06

    Tons sold (in millions)                   4.0      3.0     13.9     13.1
    Average sales price per ton            $51.48   $46.41   $48.96   $50.76
    Cash cost per ton                      $38.37   $39.87   $40.16   $42.37
    Cash margin per ton                    $13.11    $6.54    $8.80    $8.39
    Total operating cost per ton           $43.58   $43.55   $44.34   $46.10
    Operating margin per ton                $7.90    $2.86    $4.62    $4.66

    Above figures exclude transportation costs billed to customers.
    Operating cost per ton includes depreciation, depletion and amortization
    per ton.
    Arch acts as an intermediary on certain pass-through transactions that
    have no effect on company results. These transactions are not reflected
    in this table. In addition, Arch services some legacy sales contracts by
    purchasing and supplying third-party coal and records offsetting revenue
    and expenses against a reserve established to account for these
    transactions.


In Central Appalachia, Arch's fourth quarter 2007 volumes increased 1.0 million tons when compared with the prior-quarter period due to the start-up of the Mountain Laurel longwall mine on October 1. Average sales price per ton improved by $5.07 over the same time period as metallurgical coal sales doubled during the quarter just ended. Per-ton operating costs were generally flat when compared with the third quarter, while per-ton cash costs declined, benefiting from the strong start-up of the Mountain Laurel longwall operation. This strong cost performance was achieved in spite of higher sales-sensitive costs related to higher sales price realization. Arch's Central Appalachian per-ton operating margin nearly tripled in the fourth quarter of 2007 compared with the prior-quarter period.

Volumes in Central Appalachia increased in 2007 when compared with 2006 as a result of increased brokerage activity associated with Arch's margin optimization efforts. Average sales price per ton declined $1.80 over the same time period, reflecting generally weaker market conditions than in 2006. Per-ton operating costs declined $1.76 over this same time period, primarily due to the replacement of higher-cost Mingo Logan volume with lower-cost Mountain Laurel volume in the region's production mix. For the full year 2007, Arch's Central Appalachian operations contributed $4.62 per ton in operating margin compared with $4.66 per ton in 2006.

Arch Sees Dynamic Coal Markets in 2008 and Beyond

U.S. coal markets are dynamically responding to the scarcity of coal in the global landscape. With severe supply constraints in traditional coal export nations, including flooding in Australia, power outages in South Africa and coal shortages in China and India, Arch believes that U.S. coal increasingly will be valued for purposes of supply diversification.

Arch estimates that coal imports into the U.S. were essentially flat in 2007, as supply -- primarily from South America -- was diverted into higher-priced seaborne trade. Over the same time frame, U.S. coal became the swing supply for the global market. In fact, Arch estimates that U.S. coal exports grew by close to 10 million tons in 2007, and conservatively expects another 20-million-ton increase in 2008.

Pricing for international metallurgical and thermal coal has been robust, and has positively influenced pricing in key domestic coal markets. Central Appalachian coal index prices increased an average of 34 percent in 2007, and have reached the $70-per-ton mark for second quarter 2008 delivery. Likewise, Powder River Basin coal index prices increased more than 50 percent in 2007, and have approached the $15-per-ton mark for second quarter 2008 delivery.

These domestic price increases have been supported by positive supply and demand trends in U.S. coal markets. On the supply side, Arch estimates that domestic coal production declined more than 16 million tons in 2007, with more than half of this decline occurring in Central Appalachia. Looking ahead, Arch continues to expect significant geologic and regulatory challenges in Central Appalachia to constrain production in this region.

On the domestic demand side, U.S. electric generation grew by close to 3 percent in 2007, according to statistics compiled by the Edison Electric Institute. Arch estimates that coal consumption for power demand in the electric power sector increased nearly 20 million tons last year -- compared with a nearly 11 million ton decline in 2006 -- driven by relatively average economic growth and more favorable weather. During the first half of 2008, Arch expects slower growth in electric generation demand driven by a weaker U.S. economy, but forecasts U.S. coal consumption for the full year to exceed that of 2007.

Arch estimates that U.S. generators held approximately a 51-days supply in stockpiles at the end of 2007, compared with a 50-days supply at the end of 2006. Arch continues to believe that increased stockpiles, nearly all in the West, stem in part from an effort by U.S. generators to increase inventories as a hedge against future supply disruptions.

"2007 was a transitional year for U.S. coal markets," said Leer. "With increased coal consumption and reduced production levels, the market was able to essentially rebalance itself. Looking ahead, we foresee a dynamic coal market in 2008, with robust international coal demand providing the catalyst for further strengthening in domestic coal markets. While expectations for a U.S. economic slowdown remain a concern, normal weather trends and strong global markets are driving price levels to new highs."

Furthermore, Arch estimates that 14 gigawatts of new coal-fueled capacity are now under construction in the U.S., representing the addition of roughly 50 million tons of new annual coal demand. These identified plants will be phased in over the next four years, with roughly one-half expected to start-up by the end of 2009. Another 8 gigawatts -- representing more than 30 million tons of additional incremental annual coal demand -- are in advanced stages of development. Arch expects the majority of these plants to be built during the next five years.

"We believe that building new coal-fueled generation capacity is the right answer for America, as it provides us with affordable, reliable and secure domestic energy for decades to come," continued Leer. "At the same time, we believe it is essential to increase investment in technology that can make coal use in this country and around the world cleaner, more efficient and more climate-friendly."

Arch Contracts a Portion of 2008 Portfolio; Maintains Upside Potential Heading Into 2009

During the fourth quarter of 2007, Arch committed significant volumes from Central Appalachia into international and domestic metallurgical markets for 2008 and 2009 delivery at prices up to 70 percent above current domestic steam coal index prices in the region. Select 2008 business also has been placed in export steam markets at prices that meaningfully exceed comparable domestic steam coal market price indications.

In the Western Bituminous region, Arch signed sales commitments for export via rail and vessel, through the Gulf of Mexico, at substantial price premiums to prevailing fourth quarter 2007 domestic steam coal index prices in the region. The company also committed additional volumes to eastern domestic utilities at prices exceeding Arch's regional average realized pricing earned in the fourth quarter of 2007.

In the Powder River Basin, Arch signed selective sales commitments for delivery over the next two years -- and set previously committed but unpriced coal for 2008 delivery -- at pricing that exceeded the prevailing fourth quarter 2007 domestic steam coal index prices in the region.

"During the fourth quarter, Arch committed a substantial volume of coal -- principally for 2008 delivery -- into the strengthening marketplace," said Eaves. "Given significant gains in domestic pricing levels since the beginning of 2007, our market-driven sales strategy has proved profitable."

At the same time, Arch has maintained its exposure to the upside potential of coal markets through its unpriced position of between 15 million and 25 million tons in 2008, a meaningful portion of which is already committed but not yet priced. Additionally, Arch has unpriced volumes of between 85 million and 95 million tons for 2009 delivery; and between 95 million and 105 million tons for 2010 delivery.

"As previously indicated, our objective to date has been to focus on near-term agreements, preserving our very substantial upside in 2009 and 2010," continued Eaves. "Looking ahead, Arch will continue to pursue a market-driven strategy, which allows us to layer in new sales contracts as market demand dictates. We will continue to be selective in contracting, with long-term agreements predicated on securing prices that allow superior returns. We believe that this approach creates substantial value for our shareholders, and ensures that we achieve a sufficient return for all of our valuable coal reserves."

Arch Achieves Milestones in Key Performance Metrics

Arch attained an overall safety record in 2007 that was 2.5 times better than the national coal industry average, representing the company's second-best year on record as measured by its total incident rate. Several of Arch's operations were recipients of various state and national safety awards last year, including the company's Band Mill No. 2 mine, part of the Cumberland River mining complex in Central Appalachia, which was honored in September 2007 with the U.S. Department of Labor's prestigious Sentinels of Safety award as the nation's safest underground mine in 2006. This recognition marks the second year in a row that an Arch subsidiary has earned the highest national safety award in the large underground mining category. Arch's Skyline mine in Utah earned the 2005 Sentinels of Safety award in 2006.

In 2007, Arch delivered the company's best environmental compliance record in the company's 10-year history thanks to continuous improvements in environmental stewardship. Two of Arch's subsidiaries in Central Appalachia, Coal-Mac and Mountain Laurel, were honored last year with U.S. Department of the Interior awards for exemplary reclamation and good corporate citizenship practices. Arch also received three other national or state distinctions for excellence in land reclamation, wildlife habitat enhancement and community service in 2007.

Additionally, the company achieved key productivity milestones in 2007. According to the most recent industry data, Arch's surface operations were 2.7 times more productive, and its underground operations were 1.5 times more productive, than national coal industry averages for each production type. In 2007, Arch estimates that three of its underground mines were among the top eight most productive longwall mines in the U.S., including the nation's most productive longwall mine, Sufco in Utah.

"We are pleased with our achievements in each of Arch's three pillars of performance -- safety, environmental stewardship and financial performance," said Leer. "We believe these core values provide the foundation for establishing the legacy of a responsible energy company."

Arch Announces 2008 Guidance

Based on current expectations, Arch has set its guidance for 2008 as follows:

    -- Fully diluted earnings per share is expected to be between $2.00 and
       $2.50.
    -- Adjusted EBITDA is expected to be in the $680 million to $790 million
       range.
    -- Sales volume from company controlled operations is expected to be
       between 135 million to 140 million tons, excluding all purchased coal
       from third parties.
    -- Capital spending is projected to be between $310 million and $340
       million, excluding reserve additions.
    -- Depreciation, depletion and amortization expense is expected to be in
       the $280 million to $290 million range.
    -- Arch's full year 2008 effective income tax rate is projected to be
       between 8 percent and 14 percent.

"Our operations executed a solid performance in 2007," said Leer. "Over the past few years, we have worked diligently to reorient our mines to become flexible in response to market demand, while still running efficiently. Looking ahead, we expect Arch's diverse portfolio of mines to deliver a record earnings performance in 2008."

"Over the longer-term, Arch is particularly well-positioned to create substantial value for our shareholders given our size, low-cost operations, extensive low-sulfur reserve base, and leverage to the upside potential of coal markets," added Leer. "Continued elevated crude oil and natural gas prices create a compelling reference point for coal-based energy in America. We believe that domestic coal is the most affordable and abundant resource available to help meet America's growing energy needs and, with investment in clean-coal technologies, can help provide a secure and clean energy future."

A conference call regarding Arch Coal's fourth quarter 2007 financial results will be webcast live today at 11 a.m. E.S.T. The conference call can be accessed via the "investor" section of the Arch Coal Web site (http://www.archcoal.com).

St. Louis-based Arch Coal is one of the nation's largest coal producers. The company's core business is providing U.S. power generators with clean-burning, low-sulfur coal for electric generation. Through its national network of mines, Arch supplies the fuel for approximately 6 percent of the electricity generated in the United States.

Forward-Looking Statements: This press release contains "forward-looking statements" -- that is, statements related to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance, and often contain words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," or "will." Forward-looking statements by their nature address matters that are, to different degrees, uncertain. For us, particular uncertainties arise from changes in the demand for our coal by the domestic electric generation industry; from legislation and regulations relating to the Clean Air Act and other environmental initiatives; from operational, geological, permit, labor and weather-related factors; from fluctuations in the amount of cash we generate from operations; from future integration of acquired businesses; and from numerous other matters of national, regional and global scale, including those of a political, economic, business, competitive or regulatory nature. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law. For a description of some of the risks and uncertainties that may affect our future results, you should see the risk factors described from time to time in the reports we file with the Securities and Exchange Commission.



                         Arch Coal, Inc. and Subsidiaries
                   Condensed Consolidated Statements of Income
                      (In thousands, except per share data)

                                   Three Months Ended        Year Ended
                                      December 31,          December 31,
                                     2007      2006       2007        2006
                                       (Unaudited)     (Unaudited)
    Revenues
      Coal sales                   $644,399  $618,357  $2,413,644  $2,500,431

    Costs, expenses and other
      Cost of coal sales            480,097   480,518   1,888,285   1,909,822
      Depreciation, depletion and
       amortization                  67,824    57,179     242,062     208,354
      Selling, general and
       administrative expenses       24,561    23,198      84,446      75,388
      Other operating income, net    (3,163)   (3,019)    (30,766)    (29,800)
                                    569,319   557,876   2,184,027   2,163,764


          Income from operations     75,080    60,481     229,617     336,667

    Interest expense, net:
      Interest expense              (21,723)  (16,136)    (74,865)    (64,364)
      Interest income                   963       579       2,600       3,725
                                    (20,760)  (15,557)    (72,265)    (60,639)

    Other non-operating expense
      Expenses resulting from
       early debt extinguishment
       and termination
       of hedge accounting for
       interest rate swaps                -      (774)     (1,919)     (4,836)
      Other non-operating income
       (expense), net                  (147)      100        (354)     (2,611)
                                       (147)     (674)     (2,273)     (7,447)

        Income before income
         taxes                       54,173    44,250     155,079     268,581
    Provision for (benefit from)
     income taxes                   (27,200)  (35,350)    (19,850)      7,650
        Net income                   81,373    79,600     174,929     260,931
    Preferred stock dividends           (53)      (89)       (219)       (378)
        Net income available to
         common shareholders        $81,320   $79,511    $174,710    $260,553

    Earnings per common share (A)
    Basic earnings per common
     share                            $0.57     $0.56       $1.23       $1.83
    Diluted earnings per common
     share                            $0.56     $0.55       $1.21       $1.80

    Weighted average shares
     outstanding
      Basic                         142,890   141,959     142,518     142,770
      Diluted                       144,310   143,859     144,019     144,812

    Dividends declared per common
     share                            $0.07     $0.06       $0.27       $0.22

    Adjusted EBITDA (B)            $142,904  $117,660    $471,679    $545,021

    (A) All share and per share information reflects the Company's two for one
        stock split on May 15, 2006

    (B) Adjusted EBITDA is defined and reconciled under "Reconciliation of
        Non-GAAP Measures" later in this release.



                        Arch Coal, Inc. and Subsidiaries
                      Condensed Consolidated Balance Sheets
                                 (In thousands)

                                                 December 31,     December 31,
                                                     2007              2006
    Assets                                       (Unaudited)
      Current assets
        Cash and cash equivalents                   $5,080            $2,523
        Trade receivables                          229,965           212,185
        Other receivables                           19,724            48,588
        Inventories                                177,785           129,826
        Prepaid royalties                           22,055             6,743
        Deferred income taxes                       18,789            51,802
        Other                                       47,747            35,610
                    Total current assets           521,145           487,277

      Property, plant and equipment, net         2,463,638         2,243,068

      Other assets
        Prepaid royalties                          105,106           112,667
        Goodwill                                    40,032            40,032
        Deferred income taxes                      296,559           263,759
        Equity investments                          82,950            80,213
        Other                                       85,169            93,798
                                                   609,816           590,469
                    Total assets                $3,594,599        $3,320,814

    Liabilities and stockholders' equity
      Current liabilities
        Accounts payable                          $150,026          $198,875
        Accrued expenses                           188,875           190,746
        Current portion of debt and
         short-term borrowings                     217,614            51,185
                    Total current liabilities      556,515           440,806
      Long-term debt                             1,085,579         1,122,595
      Asset retirement obligations                 219,991           205,530
      Accrued postretirement benefits
       other than pension                           59,181            49,817
      Accrued workers' compensation                 41,071            43,655
      Other noncurrent liabilities                 100,576            92,817
                    Total liabilities            2,062,913         1,955,220

      Stockholders' equity
        Preferred stock                                  1                 2
        Common stock                                 1,436             1,426
        Paid-in capital                          1,358,695         1,345,188
        Retained earnings                          173,186            38,147
        Accumulated other comprehensive
         loss                                       (1,632)          (19,169)
                    Total stockholders' equity   1,531,686         1,365,594
                    Total liabilities
                     and stockholders'
                     equity                     $3,594,599        $3,320,814



                        Arch Coal, Inc. and Subsidiaries
                 Condensed Consolidated Statements of Cash Flows
                                 (In thousands)

                                                          Year Ended
                                                          December 31,
                                                    2007              2006
                                                 (Unaudited)
    Operating activities
    Net income                                    $174,929          $260,931
    Adjustments to reconcile to cash
     provided by operating activities:
      Depreciation, depletion and
       amortization                                242,062           208,354
      Prepaid royalties expensed                    11,962             9,045
      Net (gain) loss on dispositions of
       property, plant and equipment                (17,769)              649
      Gain on investment in Knight Hawk
       Holdings, LLC                                     -           (10,309)
      Employee stock-based compensation
       expense                                       5,777             9,080
      Other non-operating expense                    2,273             7,447
      Changes in:
          Receivables                               10,254           (49,265)
          Inventories                              (55,471)          (39,783)
          Accounts payable and accrued
           expenses                                (59,634)         (115,123)
          Income taxes                             (31,825)           20,505
          Other                                     48,252             6,571

        Cash provided by operating
         activities                                330,810           308,102

    Investing activities
    Capital expenditures                          (488,363)         (623,187)
    Proceeds from dispositions of
     property, plant and equipment                  70,296               777
    Purchases of investments/advances to
     affiliates                                     (5,540)          (45,533)
    Additions to prepaid royalties                 (19,713)          (20,062)
    Reimbursement of deposit on equipment           18,325                 -
        Cash used in investing activities         (424,995)         (688,005)

    Financing activities
    Net proceeds from commercial paper
     and net borrowings on lines of
     credit                                        133,476           192,300
    Net proceeds from (payments on) other
     debt                                           (2,696)              442
    Debt financing costs                              (202)           (2,171)
    Dividends paid                                 (38,945)          (31,815)
    Purchases of treasury stock                          -           (43,876)
    Issuance of common stock under
     incentive plans                                 5,109             7,045

        Cash provided by financing
         activities                                 96,742           121,925

    Increase (decrease) in cash and cash
     equivalents                                     2,557          (257,978)
    Cash and cash equivalents, beginning
     of period                                       2,523           260,501

    Cash and cash equivalents, end of
     period                                         $5,080            $2,523



                       Arch Coal, Inc. and Subsidiaries
                     Reconciliation of Non-GAAP Measures
                    (In thousands, except per share data)

    Included in the accompanying release, we have disclosed certain non-GAAP
    measures as defined by Regulation G.
    The following reconciles these items to net income as reported under GAAP.


    Adjusted EBITDA:

        Adjusted EBITDA is defined as net income before the effect of net
        interest expense; income taxes; our depreciation,
        depletion and amortization;  expenses resulting from early
        extinguishment of debt; and other non-operating expenses.

        Adjusted EBITDA is not a measure of financial performance in
        accordance with generally accepted accounting
        principles, and items excluded to calculate Adjusted EBITDA are
        significant in understanding and assessing our financial
        condition. Therefore, Adjusted EBITDA should not be considered in
        isolation nor as an alternative to net income, income
        from operations, cash flows from operations or as a measure of our
        profitability, liquidity or performance under generally
        accepted accounting principles. We believe that Adjusted EBITDA
        presents a useful measure of our ability to service and
        incur debt based on ongoing operations. Furthermore, analogous
        measures are used by industry analysts to evaluate
        operating performance. Investors should be aware that our presentation
        of Adjusted EBITDA may not be comparable to
        similarly titled measures used by other companies. The table below
        shows how we calculate Adjusted EBITDA.



                                       Three Months Ended      Year Ended
                                          December 31,        December 31,
                                         2007      2006      2007       2006
                                           (Unaudited)         (Unaudited)

    Net income                         $81,373   $79,600  $174,929   $260,931
         Income tax (benefit) expense  (27,200)  (35,350)  (19,850)     7,650
         Interest expense, net          20,760    15,557    72,265     60,639
         Depreciation, depletion and
          amortization                  67,824    57,179   242,062    208,354
         Expenses from early debt
          extinguishment and other
          non-operating                    147       674     2,273      7,447

         Adjusted EBITDA              $142,904  $117,660  $471,679   $545,021



    Reconciliation of Adjusted EBITDA to Net Income - 2008 Targets



                                                           Targeted Results
                                                              Year Ended
                                                           December 31, 2008
                                                            Low        High
                                                              (Unaudited)
    Net income                                            $290,000   $362,000
         Income tax expense                                 25,000     58,000
         Interest expense, net                              85,000     80,000
         Depreciation, depletion and
          amortization                                     280,000    290,000

         Adjusted EBITDA                                  $680,000   $790,000

Source: Arch Coal, Inc.

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